<PAGE>

                            AMERICAN INCOME FUND I



                           AMERICAN INCOME FUND I-B,

                      a Massachusetts Limited Partnership



               Annual Report to the Partners, December 31, 1996
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

                    INDEX TO ANNUAL REPORT TO THE PARTNERS

<TABLE>
<CAPTION>

                                                                            Page
                                                                            ----
<S>                                                                       <C>
SELECTED FINANCIAL DATA                                                       2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS                                         3-6


FINANCIAL STATEMENTS:

Report of Independent Auditors                                                7

Statement of Financial Position
at December 31, 1996 and 1995                                                 8

Statement of Operations
for the years ended December 31, 1996, 1995 and 1994                          9

Statement of Changes in Partners' Capital
for the years ended December 31, 1996, 1995 and 1994                         10

Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994                         11

Notes to the Financial Statements                                         12-20


ADDITIONAL FINANCIAL INFORMATION:

Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed                                      21

Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings                                      22

Schedule of Costs Reimbursed to the General
Partner and its Affiliates as Required by
Section 9.4 of the Amended and Restated
Agreement and Certificate of Limited Partnership                             23
</TABLE>

                                      -1-
<PAGE>

                            SELECTED FINANCIAL DATA


    The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.

    For each of the five years in the period ended December 31, 1996:

<TABLE>
<CAPTION>


          Summary of
          Operations              1996          1995         1994          1993         1992
-----------------------------  -----------  ------------  -----------  ------------  -----------
<S>                            <C>          <C>           <C>          <C>           <C>
Lease revenue                   $  779,404   $1,645,094    $2,323,015   $2,288,065    $2,417,713

Net income (loss)               $  609,579   $  (16,951)   $  262,463   $ (344,029)   $  366,359

Per Unit:
         Net income (loss)      $     2.02   $    (0.06)   $     0.87   $    (1.14)   $     1.21

         Cash distributions     $     1.38   $     2.25    $     3.00   $     3.00    $     3.00


      Financial Position
-----------------------------

Total assets                    $3,576,563   $3,746,642    $4,648,253   $6,405,398    $8,848,236

Total long-term
        obligations             $  726,096   $1,022,276    $1,056,876   $2,201,531    $3,262,041

Partners' capital               $2,701,770   $2,507,170    $3,203,173   $3,846,113    $5,095,545
</TABLE>

                                      -2-
<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

               Year ended December 31, 1996 compared to the year
          ended December 31, 1995 and the year ended December 31, 1995
                  compared to the year ended December 31, 1994

Overview
--------

  American Income Fund I-B, a Massachusetts Limited Partnership (the
"Partnership") was organized in 1990 as a direct-participation equipment leasing
program to acquire a diversified portfolio of capital equipment subject to lease
agreements with third parties.  The Partnership's stated investment objectives
and policies contemplated that the Partnership would wind-up its operations
within approximately seven years of its inception.  The value of the
Partnership's equipment portfolio decreases over time due to depreciation
resulting from age and usage of the equipment, as well as technological changes
and other market factors.  In addition, the Partnership does not replace
equipment as it is sold; therefore, its aggregate investment in equipment
declines from asset disposals occurring in the normal course.  As a result of
the Partnership's age and a declining equipment portfolio, the General Partner
is evaluating a variety of transactions that will reduce the Partnership's
prospective costs to operate as a publicly registered limited partnership and,
therefore, enhance overall cash distributions to the limited partners.  Such a
transaction may involve the sale of the Partnership's remaining equipment or a
transaction that would allow for the consolidation of the Partnership's expenses
with other similarly-organized equipment leasing programs.  In order to increase
the marketability of the Partnership's remaining equipment, the General Partner
expects to use the Partnership's available cash and future cash flow to retire
indebtedness.  This will negatively effect short-term cash distributions.


Results of Operations
---------------------

  For the year ended December 31, 1996, the Partnership recognized lease revenue
of $779,404, compared to $1,645,094 and $2,323,015 for the years ended December
31, 1995 and 1994, respectively.  The decrease in lease revenue from 1994 to
1996 was expected and resulted principally from primary lease term expirations
and the sale of equipment.  The Partnership also earns interest income from
temporary investments of rental receipts and equipment sales proceeds in short-
term instruments.

  The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest.  In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by Equis Financial Group Limited Partnership (formerly American
Finance Group), a Massachusetts limited partnership ("EFG").  Proportionate
equipment ownership enables the Partnership to further diversify its equipment
portfolio by participating in the ownership of selected assets, thereby reducing
the general levels of risk which could result from a concentration in any single
equipment type, industry or lessee.  The Partnership and each affiliate
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment.

  In 1996, the Partnership sold equipment having a net book value of $99,407 to
existing lessees and third parties.  These sales resulted in a net gain, for
financial statement purposes, of $563,113 compared to a net gain in 1995 of
$431,228 on equipment having a net book value of $158,265, and a net loss in
1994 of $20,751 on equipment having a net book value of $51,551.

  During July 1996, the Partnership transferred its ownership interest in
certain trailers previously leased to The Atchison Topeka and Santa Fe Railroad
("ATSF"), to a third party for cash consideration of $85,957.  The trailers had
a net book value of $32,494 at the time of transfer, resulting in a net gain of
$53,463 (See Note 3 to the financial statements).  In September 1996, the
Partnership replaced certain of these trailers with comparable trailers and
leased such to a new lessee.  The transaction was accounted for as a like-kind
exchange for income tax reporting purposes.  The net carrying value of the new
trailers, $385,063, was net of $41,241, representing the proportionate amount of
gain, for financial statement purposes, deferred on the original trailers.  The
Partnership

                                      -3-
<PAGE>

funded this transaction with $66,307 of the cash consideration and long-term
financing of $359,997. The unused consideration of $19,650 was recognized as
proceeds from equipment sales and the remainder of the net gain on sale of
$12,222 was recognized as Gain on Sale of Equipment on the Statement of
Operations during 1996.

  Additionally, during 1995, the Partnership transferred its ownership interest
in certain trailers, to a third party for cash consideration of $35,500.  The
trailers  previously leased to ATSF, had an aggregate net book value of $19,391
resulting in a net gain of $16,109.  The transaction was structured as a like-
kind exchange for income tax reporting purposes.  The Partnership replaced these
trailers with comparable trailers and leased such equipment to a new lessee.
The net carrying value of the new trailers, $137,146, was net of $16,109,
representing the amount of gain for financial statement purposes deferred on the
original trailers.  The Partnership funded this transaction with the $35,500 of
cash consideration and long-term financing of $117,755.

  It cannot be determined whether future sales of equipment will result in a net
gain or a net loss to the Partnership, as such transactions will be dependent
upon the condition and type of equipment being sold and its marketability at the
time of sale.  In addition, the amount of gain or loss reported for financial
statement purposes is partly a function of the amount of accumulated
depreciation associated with the equipment being sold.

  The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment.  Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.  EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.

  The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenues generated from that asset, together
with its residual value.  The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis.  The Partnership
classifies such residual rental payments as lease revenue.  Consequently, the
amount of gain or loss reported in the financial statements is not necessarily
indicative of the total residual value the Partnership achieved from leasing the
equipment.

  Depreciation and amortization expense was $642,750, $1,386,180 and $1,737,658
for the years ended December 31, 1996, 1995 and 1994, respectively.  For
financial reporting purposes, to the extent that an asset is held on primary
lease term, the Partnership depreciates the difference between (i) the cost of
the asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term.  For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of primary lease expiration.
To the extent that an asset is held beyond its primary lease term, the
Partnership continues to depreciate the remaining net book value of the asset on
a straight-line basis over the asset's remaining economic life.

  The Partnership recorded a write-down of the carrying value of its interests
in two aircraft, representing an impairment, during the year ended December 31,
1995.  The resulting charge, $500,000 ($1.66 per limited partnership unit) in
1995 was based on a comparison of the estimated net realizable value and
corresponding carrying value for the Partnership's interests in the aircraft.

  Net realizable value was estimated based on (i) third-party appraisals of the
Partnership's aircraft and (ii) EFG's assessment of prevailing market conditions
for similar aircraft.  In recent years, market values for used commercial jet
aircraft have deteriorated.  Consistent price competition and other pressures
within the airline industry have inhibited sustained profitability for many
carriers.  Most major airlines have had to re-evaluate their specific aircraft,
and particularly used aircraft, because cost-benefit and market considerations
may differ significantly between the major airlines.  Aircraft condition, age,
passenger capacity, distance capability, fuel efficiency, and other factors also
influence market demand and market values for passenger jet aircraft.

  Interest expense was $71,964 or 9.2% of lease revenue in 1996, $123,439 of
7.5% of lease revenue in 1995 and $150,370 or 6.5% of lease revenue in 1994.
Interest expense increased as a percentage of lease revenue due to leveragings
obtained in 1995 and 1996.  Interest expense in future years will decline in
amount and as a percentage of lease revenue as the principal balance of notes
payable is reduced through the application of rent

                                      -4-
<PAGE>

receipts to outstanding debt. In addition, the General Partner expects to use a
portion of the Partnership's available cash and future cash flow to retire
indebtedness (see Overview).

  Management fees were approximately 4.5%, 3.6% and 4.9% of lease during the
years ended December 31, 1996, 1995 and 1994, respectively.  The increase in
management fees as a percentage of lease revenue during 1996 and 1994 as
compared to 1995 resulted from reclassifications of certain leases between
operating and full-payout.  Management fees and are based on 5% of gross lease
revenue generated by operating leases and 2% of gross lease revenue generated by
full payout leases.

  Operating expenses consist principally of administrative charges, professional
service costs, such as audit and legal fees, as well as printing, distribution
and remarketing expenses.  In certain cases, equipment storage or repairs and
maintenance costs may be incurred in connection with equipment being remarketed.
Collectively, operating expenses represented 10.1%, 4.1% and 1.9% of lease
revenue during the years ended December 31, 1996, 1995, and 1994, respectively.
The increase in operating expenses from 1995 to 1996 was due primarily to an
increase in administrative charges.  The increase in operating expenses from
1994 to 1995 was due primarily to an increase in professional service costs.
The amount of future operating expenses cannot be predicted with certainty;
however, such expenses are usually higher during the acquisition and liquidation
phases of a partnership.  Other fluctuations typically occur in relation to the
volume and timing of remarketing activities.


Liquidity and Capital Resources and Discussion of Cash Flows
------------------------------------------------------------

  The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview".  As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions.  Accordingly, the Partnership's principal source of
cash from operations is provided by the collection of periodic rents.  These
cash inflows are used to satisfy debt service obligations associated with
leveraged leases, and to pay management fees and operating costs.  Operating
activities generated net cash inflows of $1,526,591, $958,185 and $1,957,297 in
1996, 1995 and 1994, respectively.  Future renewal, re-lease and equipment sale
activities will cause a gradual decline in the Partnership's lease revenues and
corresponding sources of operating cash.  Overall, expenses associated with
rental activities, such as management fees, and net cash flow from operating
activities will also decline as the Partnership experiences a higher frequency
of remarketing events.

  Ultimately, the Partnership will dispose of all assets under lease.  This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third-party.  Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term.  In certain
instances, casualty or early termination events may result in the disposal of an
asset.  Such circumstances are infrequent and usually result in the collection
of stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.

  Cash realized from asset disposal transactions is reported under investing
activities on the accompanying Statement of Cash Flows.  During 1996, the
Partnership realized $682,170 in equipment sale proceeds compared to $589,493
and $30,800 in 1995 and 1994, respectively.  Future inflows of cash from asset
disposals will vary in timing and amount and will be influenced by many factors
including, but not limited to, the frequency and timing of lease expirations,
the type of equipment being sold, its condition and age, and future market
conditions.

  The Partnership obtained long-term financing in connection with certain
equipment leases.  The origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities.
Cash inflows of $737,116 during the year ended December 31, 1995 resulted from
leveraging a portion of the Partnership's equipment portfolio with third-party
lenders.  Each note payable is recourse only to the specific equipment financed
and to the minimum rental payments contracted to be received during the debt
amortization period (which period generally coincides with the lease rental
term).  As rental payments are collected, a portion or all of the rental payment
is used to repay the associated indebtedness.  In future periods, the amount of
cash used to repay debt obligations is scheduled to decline as the principal
balance of notes payable is reduced through the

                                      -5-
<PAGE>

collection and application of rents. However, in future years, the amount of
cash used to repay debt obligations may fluctuate due to the use of the
Partnership's available cash and future cash flow to retire indebtedness (see
Overview). In September 1996, the Partnership obtained additional long-term
financing in connection with the like-kind exchange transaction involving
certain trailers (see Results of Operations).

  Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities.  For the year ended December 31, 1996, the Partnership declared
total cash distributions of Distributable Cash From Operations and Distributable
Cash From Sales and Refinancings of $414,979.  In accordance with the Amended
and Restated Agreement and Certificate of Limited Partnership, the Limited
Partners were allocated 95% of these distributions, or $394,230 and the General
Partner was allocated 5%, or $20,749. The fourth quarter 1996 cash distribution
was paid on January 13,1997.

  Cash distributions paid to the Limited Partners consist of both a return of
and a return on capital.  Cash distributions do not represent and are
not indicative of yield on investment.  Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date.  Future market conditions, technological changes, the ability
of EFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.

  The future liquidity of the Partnership will be influenced by the foregoing
and will be greatly dependent upon the collection of contractual rents and the
outcome of residual activities.  The General Partner anticipates that cash
proceeds resulting from these sources will satisfy the Partnership's future
expense obligations.  However, the amount of cash available for distribution in
future periods will fluctuate.  Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities.  Accordingly,
fluctuations in the level of quarterly cash distributions will occur during the
life of the Partnership.

                                      -6-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


To the Partners of American Income Fund I-B,
a Massachusetts Limited Partnership:


    We have audited the accompanying statements of financial position of
American Income Fund I-B, a Massachusetts Limited Partnership as of December 31,
1996 and 1995, and the related statements of operations, changes in partners'
capital, and cash flows for each of the three years in the period ended December
31, 1996.  These financial statements are the responsibility of the
Partnership's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

    We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Income Fund I-B, a
Massachusetts Limited Partnership at December 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

    Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole.  The Additional Financial Information
identified in the Index to Annual Report to the Partners is presented for
purposes of additional analysis and is not a required part of the basic
financial statements.  Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.



                                                               ERNST & YOUNG LLP



Boston, Massachusetts
March 14, 1997

                                      -7-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

                        STATEMENT OF FINANCIAL POSITION
                           December 31, 1996 and 1995
<TABLE>
<CAPTION>
                                              1996          1995
                                          ------------  ------------

ASSETS
------
<S>                                       <C>           <C>
Cash and cash equivalents                  $1,938,967    $  839,087

Rents receivable                                1,509       332,823

Accounts receivable - affiliate                38,647       587,704

Equipment at cost, net of accumulated
   depreciation of $3,460,675 and
   $6,097,419 at December 31, 1996
   and 1995, respectively                   1,597,440     1,986,861

Organization costs, net of accumulated
   amortization of $5,000 and $4,833 at
   December 31, 1996 and 1995,
   respectively                                    --           167
                                           ----------    ----------

     Total assets                          $3,576,563    $3,746,642
                                           ==========    ==========


LIABILITIES AND PARTNERS' CAPITAL
---------------------------------

Notes payable                              $  726,096    $1,022,276
Accrued interest                                3,883        28,320
Accrued liabilities                            22,750        68,610
Accrued liabilities - affiliate                20,448         7,090
Deferred rental income                         26,165            --
Cash distributions payable to partners         75,451       113,176
                                           ----------    ----------

   Total liabilities                          874,793     1,239,472
                                           ----------    ----------

Partners' capital (deficit):
   General Partner                           (182,282)     (192,012)
   Limited Partnership Interests
   (286,711 Units; initial purchase
   price of $25 each)                       2,884,052     2,699,182
                                           ----------    ----------

   Total partners' capital                  2,701,770     2,507,170
                                           ----------    ----------
   Total liabilities and partners'
    capital                                $3,576,563    $3,746,642
                                           ==========    ==========
</TABLE>


                The accompanying notes are an integral part of
                          these financial statements.

                                      -8-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

                            STATEMENT OF OPERATIONS
              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                          1996         1995          1994
                                       ----------  ------------  ------------

Income:
<S>                                    <C>         <C>           <C>
   Lease revenue                       $  779,404   $1,645,094    $2,323,015

   Interest income                         83,113       43,111         6,890

   Gain (loss) on sale of equipment       575,335      431,228       (20,751)
                                       ----------   ----------    ----------

       Total income                     1,437,852    2,119,433     2,309,154
                                       ----------   ----------    ----------

Expenses:
   Depreciation and amortization          642,750    1,386,180     1,737,658

   Write-down of equipment                     --      500,000            --

   Interest expense                        71,964      123,439       150,370
   Equipment management fees
       - affiliate                         34,740       59,401       114,433

   Operating expenses - affiliate          78,819       67,364        44,230
                                       ----------   ----------    ----------

       Total expenses                     828,273    2,136,384     2,046,691
                                       ----------   ----------    ----------

Net income (loss)                      $  609,579   $  (16,951)   $  262,463
                                       ==========   ==========    ==========

Net income (loss)
   per limited partnership unit        $     2.02       $(0.06)   $     0.87
                                       ==========   ==========    ==========

Cash distributions declared
   per limited partnership unit        $     1.38        $2.25    $     3.00
                                       ==========   ==========    ==========
</TABLE>

                The accompanying notes are an integral part of
                          these financial statements.

                                      -9-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                  General      Limited Partners
                                  Partner    ---------------------
                                  Amount      Units      Amount        Total
                                -----------  -------  ------------  ------------
<S>                             <C>          <C>      <C>           <C>
Balance at December 31, 1993     $(125,064)  286,711   $3,971,177    $3,846,113

Net income - 1994                   13,123        --      249,340       262,463

Cash distributions declared        (45,270)       --     (860,133)     (905,403)
                                 ---------   -------   ----------    ----------

Balance at December 31, 1994      (157,211)  286,711    3,360,384     3,203,173

Net loss - 1995                       (848)       --      (16,103)      (16,951)

Cash distributions declared        (33,953)       --     (645,099)     (679,052)
                                 ---------   -------   ----------    ----------

Balance at December 31, 1995      (192,012)  286,711    2,699,182     2,507,170

Net income - 1996                   30,479        --      579,100       609,579

Cash distributions declared        (20,749)       --     (394,230)     (414,979)
                                 ---------   -------   ----------    ----------

Balance at December 31, 1996     $(182,282)  286,711   $2,884,052    $2,701,770
                                 =========   =======   ==========    ==========
</TABLE>

                The accompanying notes are an integral part of
                          these financial statements.

                                      -10-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

                            STATEMENT OF CASH FLOWS
              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                              1996         1995          1994
                                          ------------  -----------  -----------
<S>                                       <C>           <C>          <C>
Cash flows from (used in) operating
 activities:
Net income (loss)                         $   609,579   $  (16,951)  $   262,463

Adjustments to reconcile net income
 (loss) to net cash from operating
    activities:
   Depreciation and amortization              642,750    1,386,180     1,737,658
   Write-down of equipment                         --      500,000            --
   (Gain) loss on sale of equipment          (575,335)    (431,228)       20,751

Changes in assets and liabilities:
   Decrease (increase) in:
       Rents receivable                       331,314      105,551       (85,716)
       Accounts receivable - affiliate        549,057     (527,535)       (8,309)
   Increase (decrease) in:
       Accrued interest                       (24,437)     (22,644)      (27,536)
       Accrued liabilities                    (45,860)      13,118        13,118
       Accrued liabilities - affiliate         13,358      (23,042)       26,735
       Deferred rental income                  26,165      (25,264)       18,133
                                          -----------   ----------   -----------
       Net cash from operating
        activities                          1,526,591      958,185     1,957,297
                                          -----------   ----------   -----------

Cash flows from investing activities
   Proceeds from equipment sales              682,170      589,493        30,800
                                          -----------   ----------   -----------

       Net cash from investing
        activities                            682,170      589,493        30,800
                                          -----------   ----------   -----------

Cash flows from (used in) financing
 activities:
   Proceeds - notes payable                        --      737,116            --
   Principal payments - notes payable        (656,177)    (889,469)   (1,144,655)
   Distributions paid                        (452,704)    (792,228)     (905,403)
                                          -----------   ----------   -----------
       Net cash used in financing
        activities                         (1,108,881)    (944,581)   (2,050,058
                                          -----------   ----------   -----------

Net increase (decrease) in cash and
   cash equivalents                         1,099,880      603,097       (61,961)

Cash and cash equivalents at beginning
 of year                                      839,087      235,990       297,951
                                          -----------   ----------   -----------

Cash and cash equivalents at end of year  $ 1,938,967   $  839,087   $   235,990
                                          ===========   ==========   ===========

Supplemental disclosure of cash flow
 information:
   Cash paid during the year for
    interest                              $    96,401   $  146,083   $   177,906
                                          ===========   ==========   ===========
</TABLE>

Supplemental disclosure of non-cash investing and financing activities:
  See Note 3 to the financial statements.


                The accompanying notes are an integral part of
                          these financial statements.

                                      -11-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements


                               December 31, 1996


NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
---------------------------------------------

    The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on December
31, 1990, for the purpose of acquiring and leasing to third parties a
diversified portfolio of capital equipment.  Partners' capital initially
consisted of contributions of $1,000 from the General Partner (AFG Leasing VI
Incorporated) and $100 from the Initial Limited Partner (AFG Assignor
Corporation).  On March 1, 1991, the Partnership issued 286,711 units of limited
partnership interest (the "Units") to 453 investors.  The Partnership's General
Partner, AFG Leasing VI Incorporated, is a Massachusetts corporation formed in
1990 and an affiliate of Equis Financial Group Limited Partnership (formerly
American Finance Group), a Massachusetts limited partnership ("EFG").  The
General Partner is not required to make any other capital contributions except
as may be required under the Uniform Act and Section 6.1(b) of the Amended and
Restated Agreement and Certificate of Limited Partnership ("Restated Agreement,
as amended").

    Significant operations commenced March 1, 1991 when the Partnership made its
initial equipment purchase.  Pursuant to the Restated Agreement, as amended,
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 95% to the Limited Partners and 5% to the General
Partner.

    Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services.  (Also see Note
4.)

    EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG").  AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980.  EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Partnership and
several other Direct-Participation equipment leasing programs sponsored or co-
sponsored by EFG (the "Other Investment Programs").  The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.

    The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer.  Equis Corporation also
owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP").  Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.

    In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party (the "Buyer").  AFG changed its name
to Equis Financial Group Limited Partnership after the sale was concluded.
Pursuant to terms of the sale agreements, EFG agreed not to compete with the
Buyer's lease origination business for a period of five years; however, EFG is
permitted to originate certain equipment leases, principally those involving
non-investment grade lessees and ocean-going vessels, which are not in
competition with the Buyer.  In addition, the sale agreements specifically
reserved to EFG the rights to continue using the name American Finance Group and
its acronym in connection with the Partnership and the Other Investment Programs
and to continue managing all assets owned by the Partnership and the Other
Investment Programs, including the right to satisfy all required equipment
acquisitions utilizing either brokers or the Buyer.  Geoffrey A. MacDonald,
Chairman of Equis Corporation and Gary D. Engle agreed not to compete with the
sold business on terms and conditions similar to those for the Company.

                                      -12-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

Statement of Cash Flows
-----------------------

    The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents.  From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities.  Under the terms of the
agreements, title to the underlying securities passes to the Partnership.  The
securities underlying the agreements are book entry securities.  At December 31,
1996, the Partnership had $1,815,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.

Revenue Recognition
-------------------

    Rents are payable to the Partnership monthly, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable.  Rents
received prior to their due dates are deferred.  Future minimum rents of
$1,021,183 are due as follows:

<TABLE>
<CAPTION>
    <S>                                           <C>
    For the year ending December 31, 1997         $  506,477
                                     1998            176,915
                                     1999            129,156
                                     2000            112,906
                                     2001             74,445
                               Thereafter             21,284
                                                  ----------

                                    Total         $1,021,183
                                                  ==========
</TABLE>

    Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995 and 1994 is as
follows:

<TABLE>
<CAPTION>
                                  1996          1995          1994
                                ---------     ---------     ---------
<S>                             <C>           <C>           <C>
Horizon Air Industries, Inc.     $278,206      $278,208      $393,598
General Motors Corporation       $175,380      $181,185            --
Fred Meyer, Inc.                 $149,291      $358,298      $409,076
Cyclops Industries, Inc.               --      $301,202      $278,033
</TABLE>

Use of Estimates
----------------

      The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes.  Actual results could differ from those estimates.

Equipment on Lease
------------------

    All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers.
Equipment cost represents asset base price plus acquisition fees and was
determined in accordance with the Restated Agreement, as amended, and certain
regulatory guidelines.  Asset base price is affected by the relationship of the
seller to the Partnership as summarized herein.  Where the

                                      -13-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


seller of the equipment was EFG or an affiliate, asset base price was the lower
of (i) the actual price paid for the equipment by EFG or the affiliate plus all
actual costs accrued by EFG or the affiliate while carrying the equipment less
the amount of all rents earned by EFG or the affiliate prior to selling the
equipment or (ii) fair market value as determined by the General Partner in its
best judgment, including all liens and encumbrances on the equipment and other
actual expenses. Where the seller of the equipment was a third party who did not
manufacture the equipment, asset base price was the lower of (i) the price
invoiced by the third party or (ii) fair market value as determined by the
General Partner. Where the seller of the equipment was a third party who also
manufactured the equipment, asset base price was the manufacturer's invoice
price, which price was considered to be representative of fair market value.

Depreciation and Amortization
-----------------------------

    The Partnership's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit.  The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset.  Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term.  For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration.  To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the General Partner evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value.  Adjustments to
reduce the net carrying value of equipment are recorded in those instances where
estimated net realizable value is considered to be less than net carrying value.
Such adjustments are reflected separately on the accompanying Statement of
Operations as Write-Down of Equipment.

    The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.  EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.

    Organization costs are amortized using the straight-line method over a
period of five years.

Accrued Liabilities - Affiliate
-------------------------------

    Unpaid operating expenses and fees paid by EFG on behalf of the Partnership
and accrued but unpaid administrative charges are reported as Accrued
Liabilities - Affiliate. (See Note 4.)

Allocation of Profits and Losses
--------------------------------

    For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the Limited
Partners and 5% to the General Partner).  See Note 6 for allocation of income or
loss for income tax purposes.

Net Income (Loss) and Cash Distributions Per Unit
-------------------------------------------------

    Net income (loss) and cash distributions per Unit are based on 286,711 Units
outstanding during each of the three years in the period ended December 31, 1996
and computed after allocation of the General Partner's 5% share of net income
(loss) and cash distributions.

                                      -14-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


Provision for Income Taxes
--------------------------

    No provision or benefit from income taxes is included in the accompanying
financial statements.  The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.

Impact of Recently Issued Accounting Standards
----------------------------------------------

    In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.  Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.  The
Partnership adopted Statement 121 in the first quarter of 1996.  The adoption of
Statement 121 did not have a material effect on the financial statements of the
Partnership.


NOTE 3 - EQUIPMENT
------------------

    The following is a summary of equipment owned by the Partnership at December
31, 1996.  In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.

<TABLE>
<CAPTION>
                             Lease Term    Equipment
      Equipment Type          (Months)      at Cost             Location
---------------------------  ----------  --------------  -----------------------
<S>                          <C>         <C>             <C>
Aircraft                            38     $ 2,641,262   OR
Materials handling                4-60         789,333   CA/GA/KY/MI/NV/TN/TX/UT
Trailers/intermodel
 containers                      60-84         620,259   GA/IL/MI/OK
Research and test                24-60         532,779   CA/CO/NJ
Construction and mining          48-60         371,529   IL
Communications                   22-52         102,953   CO/FL/ID/OH/WA
                                           -----------

                  Total equipment cost       5,058,115

              Accumulated depreciation      (3,460,675)
                                           -----------

         Equipment, net of accumulated
                          depreciation     $ 1,597,440
                                           ===========
</TABLE>

    During 1996, the Partnership transferred its ownership interest in certain
trailers previously leased to The Atchison Topeka and Santa Fe Railroad ("ATSF")
to a third party for cash consideration of $85,957.  The trailers had a net book
value of $32,494 at the time of transfer, resulting in a net gain of $53,463.
The Partnership replaced certain of these trailers with comparable trailers and
leased such to a new lessee.  The transaction was accounted for as a like-kind
exchange for income tax reporting purposes.  The net carrying value of the new
trailers, $385,063, was net of $41,241, representing the proportionate amount of
gain, for financial statement purposes, deferred on the original trailers.  The
Partnership funded this transaction with $66,307 of the cash consideration and
long-term financing of $359,997.  The unused consideration of $19,650 was
recognized as proceeds from equipment sales and the remainder of the net gain on
sale of $12,222 was recognized as Gain on Sale of Equipment on the Statement of
Operations during 1996.

                                      -15-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


    During 1995, the Partnership transferred its ownership interest in certain
trailers, to a third party for cash consideration of $35,500.  The trailers
previously leased to ATSF, had an aggregate net book value of $19,391 resulting
in a net gain of $16,109.  The transaction was structured as a like-kind
exchange for income tax reporting purposes.  The Partnership replaced these
trailers with comparable trailers and leased such equipment to a new lessee.
The net carrying value of the new trailers, $137,146, was net of $16,109,
representing the amount of gain, for financial statement purposes, deferred on
the original trailers.  The Partnership funded this transaction with the $35,500
of cash consideration and long-term financing of $117,755.

    In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest.  The remaining interests are owned by EFG or
an affiliated equipment leasing program sponsored by EFG.  The Partnership and
each affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment.  Proportionate equipment ownership
enables the Partnership to further diversify its equipment portfolio by
participating in the ownership of selected assets, thereby reducing the general
levels of risk which could result from a concentration in any single equipment
type, industry or lessee.  At December 31, 1996, the Partnership's equipment
portfolio included equipment having a proportionate original cost of $2,792,790,
representing approximately 55% of total equipment cost.

    Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders.  The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $3,163,000
and a net book value of approximately $1,512,000 at December 31, 1996.  (See
Note 5.)

    Generally, the costs associated with maintaining, insuring and operating the
Partnership's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Partnership.

    As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition.  The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms.  The summary above includes equipment
held for re-lease or sale with a cost and net book value of approximately
$369,000 and $7,000, respectively, at December 31, 1996.  The General Partner is
actively seeking the sale or re-lease of all equipment not on lease.

    The Partnership recorded a write-down of the carrying value of its interests
in two aircraft, representing an impairment, during the year ended December 31,
1995.  The resulting charge, $500,000 ($1.66 per limited partnership unit) in
1995 was based on a comparison of the estimated net realizable value and
corresponding carrying value for the Partnership's interest in the aircraft.


NOTE 4 - RELATED PARTY TRANSACTIONS
-----------------------------------

    All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures.  Fees and other costs incurred during the years ended December 31,
1996, 1995 and 1994, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:

                                      -16-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


<TABLE>
<CAPTION>
                                      1996       1995       1994
                                    ---------  ---------  ---------
<S>                                 <C>        <C>        <C>
Equipment management fees            $ 34,740   $ 59,401   $114,433
Administrative charges                 31,872     14,172     12,000
Reimbursable operating
   expenses due to third parties       46,947     53,192     32,230
                                     --------   --------   --------
                           Total     $113,559   $126,765   $158,663
                                     ========   ========   ========
</TABLE>

    As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership.  Such services include all aspects of
acquisition, management and sale of equipment.  For acquisition services, EFG is
compensated by an amount equal to 2.23% of Equipment Base Price paid by the
Partnership.  For management services, EFG is compensated by an amount equal to
the lesser of (i) 5% of gross operating lease rental revenues and 2% of gross
full payout lease rental revenues received by the Partnership or (ii) fees which
the General Partner reasonably believes to be competitive for similar services
for similar equipment.  Both of these fees are subject to certain limitations
defined in the Management Agreement. Compensation to EFG for services connected
to the sale of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances.  Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
Agreement.

    Administrative charges represent amounts owed to EFG, pursuant to Section
9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG.

    All equipment was purchased from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers. The
Partnership's Purchase Price is determined by the method described in Note 2.

    All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender.  EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1996, the Partnership was owed $38,647 by EFG for such funds and
the interest thereon.

     On August 18, 1995, Atlantic Acquisition Limited Partnership ("AALP"), a
newly formed Massachusetts limited partnership owned and controlled by certain
principals of EFG, commenced a voluntary cash Tender Offer (the "Offer") for up
to approximately 45% of the outstanding units of limited partner interest in
this Partnership and 20 affiliated partnerships sponsored and managed by EFG.
The Offer was subsequently amended and supplemented in order to provide
additional disclosure to unitholders; increase the offer price; reduce the
number of units sought to approximately 35% of the outstanding units; and extend
the expiration date of the Offer to October 20, 1995.  Following commencement of
the Offer, certain legal actions were initiated by interested persons against
AALP, each of the general partners (4 in total) of the 21 affected programs, and
various other affiliates and related parties.  One action, a class action
brought in the United States District Court for the District of Massachusetts
(the "Court") on behalf of the unitholders (limited partners), sought to enjoin
the Offer and obtain unspecified monetary damages.  A settlement of this
litigation was approved by the Court on November 15, 1995. The Plaintiffs filed
an appeal in this matter.  On November 26, 1996, the United States Court of
Appeals for the First Circuit handed down a decision affirming the Court's
approval of the settlement.  A second class action, brought in the Superior
Court of the Commonwealth of Massachusetts (the "Superior Court") seeking to
enjoin the

                                      -17-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


Offer, obtain unspecified monetary damages, and intervene in the first class
action, was dismissed by the Superior Court. The limited partners of the
Partnership tendered approximately 11,442 units or 3.99% of the total
outstanding units of the Partnership to AALP. The operations of the Partnership
were not adversely affected by these proceedings or settlements. On December 1,
1996, EFG purchased a Class D interest, representing a 49% economic interest in
AALP.


NOTE 5 - NOTES PAYABLE
----------------------

    Notes payable at December 31, 1996 consisted of installment notes of
$726,096 payable to banks and institutional lenders.  All of the installment
notes are non-recourse, with interest rates ranging between 7.04% and 10.12% and
are collateralized by the equipment and assignment of the related lease
payments.  The installment notes will be fully amortized by noncancellable
rents.  The carrying value of notes payable approximates fair value at December
31, 1996.

    The annual maturities of the installment notes payable are as follows:

<TABLE>
<S>                                     <C>        <C>
    For the year ending December 31, 1997          338,203
                                     1998          106,025
                                     1999           91,104
                                     2000           99,967
                                     2001           70,303
                               Thereafter           20,494
                                                  --------

                                    Total         $726,096
                                                  ========
</TABLE>

NOTE 6 - INCOME TAXES
---------------------

    The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.

    For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Limited Partners and 5% to the General Partner).  This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended.  For income tax purposes, the Partnership allocates net income or net
loss in accordance with the provisions of such agreement.  The Restated
Agreement, as amended, requires that upon dissolution of the Partnership, the
General Partner will be required to contribute to the Partnership an amount
equal to any negative balance which may exist in the General Partner's tax
capital account.  At December 31, 1996, the General Partner had a positive tax
capital account balance.

    The following is a reconciliation between net income or loss reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1996, 1995 and 1994:

                                      -18-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


<TABLE>
<CAPTION>
                                         1996        1995       1994
                                       ---------  ----------  ---------
<S>                                    <C>        <C>         <C>
Net income (loss)                       $609,579  $ (16,951)   $262,463
   Financial statement depreciation
   in excess of tax depreciation          61,886    591,644     585,776
   Write-down equipment                       --    500,000          --
   Prepaid rental income                  26,165    (25,264)     18,133
   Other                                 123,033   (272,800)     26,026
                                        --------  ---------    --------

Net income for federal income tax
   reporting purposes                   $820,663  $ 776,629    $892,398
                                        ========  =========    ========
</TABLE>

    The principal component of "Other" consists of the difference between the
tax gain on equipment disposals and the financial statement gain (loss) on
disposals.

    The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                      1996             1995
                                                  ------------     ------------
<S>                                               <C>              <C>
Partners' capital                                  $2,701,770      $ 2,507,170
   Add back selling commissions and
    organization and offering costs                   801,375          801,375

   Financial statement distributions in
    excess of tax distributions                         3,773            5,659

   Cumulative difference between
    federal income tax and financial statement
    income (loss)                                    (846,668)      (1,057,752)
                                                   ----------      -----------

Partners' capital for federal income
   tax reporting purposes                          $2,660,250      $ 2,256,452
                                                   ==========      ===========
</TABLE>

    Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.


NOTE 7 - LEGAL PROCEEDINGS
--------------------------

    On July 27, 1995, EFG, on behalf of the Partnership and other EFG-sponsored
investment programs, filed an action in the Commonwealth of Massachusetts
Superior Court Department of the Trial Court in and for the County of Suffolk,
for damages and declaratory relief against a lessee of the Partnership, National
Steel Corporation  ("National Steel"), under a certain Master Lease Agreement
("MLA") for the lease of certain equipment.  EFG is seeking the reimbursement by
National Steel of certain sales and/or use taxes paid to the State of Illinois
and other remedies provided by the MLA.  On August 30, 1995, National Steel
filed a Notice of Removal which removed the case to the United States District
Court, District of Massachusetts.  On

                                      -19-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership
                       Notes to the Financial Statements

                                  (Continued)


September 7, 1995, National Steel filed its Answer to EFG's Complaint along with
Affirmative Defenses and Counterclaims, seeking declaratory relief and alleging
breach of contract, implied covenant of good faith and fair dealing and specific
performance. EFG filed its Answer to these counterclaims on September 29, 1995.
Though the parties have been discussing settlement with respect to this matter
for some time, to date, the negotiations have been unsuccessful. Notwithstanding
these discussions, EFG recently filed an Amended and Supplemental Complaint
alleging further default under the MLA and the matter remains pending before the
Court. The Partnership has not experienced any material losses as a result of
this action.

    In July 1993, Fred Meyer, Inc. (the "Plaintiff"), in anticipation of a
declaration of lease default by EFG, filed a complaint against EFG (the
"Defendant") in the Circuit Court of the State of Oregon as a result of a
dispute which arose between the Plaintiff and the Defendant concerning holdover
rents due to the Partnership with respect to certain equipment and the fair
market value of such equipment leased by the Partnership to the Plaintiff.  The
Defendant filed an answer to the Plaintiff's complaint and asserted a
counterclaim seeking monetary damages.  A Settlement Agreement executed on June
22, 1994, including dismissal of this case, requires the Plaintiff to purchase
all equipment it leases pursuant to unexpired rental schedules upon the
respective expiration dates of each schedule.  During 1996, the Partnership sold
all of the affected equipment having a cost and net book value of $1,740,599 and
$93,931, respectively, and recognized a net gain of $477,391 for financial
statement purposes.  This settlement did not have an adverse effect on the
financial position of the Partnership.

                                      -20-
<PAGE>

                       ADDITIONAL FINANCIAL INFORMATION

<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

        SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
                             OF EQUIPMENT DISPOSED

              for the years ended December 31, 1996, 1995 and 1994


    The Partnership classifies all rents from leasing equipment as lease
revenue.  Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement.  The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenue, represent the total
residual value realized for each item of equipment.  Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.

    The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
                                             1996         1995        1994
                                          -----------  -----------  --------
<S>                                       <C>          <C>          <C>
Rents earned prior to disposal of          $3,329,290   $1,597,784  $ 96,844
   equipment, net of interest charges

Sale proceeds realized upon disposition
   of equipment                               682,170      589,493    30,800
                                           ----------   ----------  --------
Total cash generated from rents
   and equipment sale proceeds              4,011,460    2,187,277   127,644

Original acquisition cost of equipment
   disposed                                 3,411,228    2,023,401   108,523
                                           ----------   ----------  --------
Excess of total cash generated to cost
   of equipment disposed                   $  600,232   $  163,876  $ 19,121
                                           ==========   ==========  ========
</TABLE>

                                      -21-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

           STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
                             SALES AND REFINANCINGS

                      for the year ended December 31, 1996

<TABLE>
<CAPTION>
                                                    Sales and
                                    Operations    Refinancings       Total
                                  --------------  -------------  --------------
<S>                               <C>             <C>            <C>
Net income                           $   34,244      $ 575,335      $  609,579

Add:
   Depreciation and amortization        642,750             --         642,750
   Management fees                       34,740             --          34,740
   Book value of disposed
    equipment                                --        106,835         106,835

Less:
   Principal reduction of notes
    payable                            (656,177)            --        (656,177)
                                     ----------      ---------      ----------

   Cash from operations, sales
    and refinancings                     55,557        682,170         737,727

Less:
   Management fees                      (34,740)            --         (34,740)
                                     ----------      ---------      ----------

   Distributable cash from
    operations, sales and
    refinancings                         20,817        682,170         702,987

Other sources and uses of cash:
   Cash at beginning of year            839,087             --         839,087

   Net change in receivables and
   accruals                             849,597             --         849,597

Less:
   Cash distributions paid                   --       (452,704)       (452,704)
                                     ----------      ---------      ----------

Cash at end of year                  $1,709,501      $ 229,466      $1,938,967
                                     ==========      =========      ==========
</TABLE>

                                      -22-
<PAGE>

                           AMERICAN INCOME FUND I-B,
                      a Massachusetts Limited Partnership

                      SCHEDULE OF COSTS REIMBURSED TO THE
                 GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
                   BY SECTION 9.4 OF THE AMENDED AND RESTATED
                AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP

                               December 31, 1996



    For the year ended December 31, 1996, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:



     Operating expenses                      $64,473

                                      -23-